News Column

Fitch: Viacom's Ratings Unaffected by Acquisition of Channel 5

May 1, 2014

CHICAGO--(BUSINESS WIRE)-- In Fitch Ratings' view, Viacom Inc.'s (Viacom) 'BBB+' Issuer Default Rating (IDR) is not affected by the company's announcement to acquire Channel 5 Broadcasting Limited (Channel 5). A full list of Fitch's ratings on Viacom follows at the end of this release.

Viacom announced the acquisition of Channel 5 for BP450 million (approximately $757 million) and the purchase price will be funded with existing cash held outside the U.S. Viacom's consolidated cash balance totaled approximately $1.97 billion (pro forma for April's redemption of the $600 million 4.375% notes due 2014).

The Channel 5 acquisition expands Viacom's international footprint in Britain providing a platform to leverage Viacom's popular content in the fast growing international marketplace (currently 25% of sales). Further in line with Viacom's strategy to increase investment in original programming, Fitch expects Viacom to increase its programming and production investment in Channel 5 and leverage this programming across Europe. Channel 5's business consists of broadcast channels including its public sector broadcasting channel. Fitch believes the company generated approximately $600 million of largely advertising-based revenue during 2013. Operating margins generated by Channel 5 are expected to be consistent with Viacom's international business margins which range in the low- to mid-teens.

The acquisition is not expected to affect the pace of anticipated share repurchases. Shareholder returns exceeding free cash flow (FCF) generation are incorporated into current ratings to the extent that leverage remains at or below Fitch's 3x total leverage threshold. Viacom repurchased 10 million shares of its common stock during the quarter ended March 31, 2014 for approximately $850 million. Share repurchases are expected to exceed $3.25 billion for the fiscal year ending September 2014. Fitch expects that Viacom will manage its share repurchase program within the context of its 2.75x to 3x leverage target. Fitch believes that Viacom will place a priority on managing its balance sheet to its leverage target and curtail the level of share repurchases in the event the macro-economic environment weakens or the company's operating profile begins to deteriorate. As of March 31, 2014, Viacom had approximately $8 billion of capacity under its share repurchase program.

Fitch calculates leverage at approximately 2.9x pro forma for April's redemption. Fitch expects Viacom to manage its leverage within its stated targets of 2.75x to 3x range. Total face value of debt outstanding after the April redemption was approximately $13.2 billion.

In Fitch's view, Viacom's liquidity is strong and supported by expected FCF generation. Additional financial flexibility is provided by the company's $2.5 billion revolving credit facility (fully available as of March 31, 2014) and $1.97 billion of cash on hand. Commitments under Viacom's revolver expire on Nov. 9, 2017. Upcoming maturities, pro forma for the redemption discussed above, include $850 million due in 2015, approximately $1.3 billion due in 2016 and $1 billion due in 2017. The maturities are well-laddered and manageable considering expected FCF generation, reliable market access and back-up liquidity.

Overall, Fitch's ratings incorporate Viacom's strong and consistent FCF, high level of financial flexibility, solid credit protection metrics, sound liquidity, and leading market positions within its core businesses in numerous attractive demographics. A level of ratings volatility at any given network is also factored into the ratings. Fitch anticipates the company's operating profile will strengthen in fiscal 2014 largely based on stable macro-economic and advertising markets, improving ratings within key networks, and double-digit affiliate revenue growth.

Rating concerns center on the company's ability to adapt to changing media consumption patterns and technology platforms as well as its capacity to deliver programming to its cable networks that drives incremental share of an increasingly fragmented viewing audience. Additional ratings considerations include Viacom's exposure to cyclical advertising revenues (moderate relative to peer group) and the inherent volatility of the company's Filmed Entertainment business segment.

Fitch's ratings for Viacom are as follows:

--Long-term IDR 'BBB+';

--Senior unsecured notes and debentures 'BBB+';

--Senior unsecured bank facility due 2017 'BBB+';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology, Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

David Peterson

Senior Director

+1-312-368-3177

Fitch Ratings, Inc.

70 W. Madison Street

Chicago, IL 60602

or

Secondary Analyst

Rolando Larrondo

Senior Director

+1-212-908-9189

or

Committee Chairperson

Mike Simonton

Managing Director

+1-312-368-3138

or

Media Relations:

Brian Bertsch, New York, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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